Traditional actively-managed open-end mutual funds and non-exchange-traded index mutual funds (e.g., those funds registered under the Investment Company Act of 1940) are not “listed” with (and therefore their purchase and redemption orders are not processed on) traditional Securities Exchanges or traditional Securities Markets. Nor are such open-end mutual funds and non-exchange-traded index mutual funds available on electronic communications networks (“ECNs”) or alternative trading systems (“ATS”) having connectivity with their respective Member Firms or participating brokers for end of day, periodic or continuous processing. These mutual funds are currently not Securities Exchange “listed” because (i) Securities Exchanges and other related trading platforms have traditionally been markets for the intra-day price discovery of traditional “listed” securities among their Member Firms, their Member Firms' customers, and participating brokers; (ii) listed securities (e.g., of stock companies, closed-end funds, special purpose acquisition companies (“SPAC”), structured products and the like), other than exchange traded index funds (“ETF”), have a finite number of shares which are bought and sold on Securities Exchanges or other trading platforms (by comparison, traditional open-end mutual funds, via prospectus, continuously offer their shares for payment via purchases by investors, and continuously redeem their shares for payment to investors); and (iii) traditional mutual funds, whether ‘load’ or ‘no-load’ funds, are purchased or redeemed after the calculation of the fund's net asset value (“NAV”), which is usually computed at the end of the trading day.
Net Asset Value (NAV) per share of a mutual fund represents the total assets owned by the fund, less the total liabilities, divided by the number of fund shares outstanding. The value of a share of a traditional open-end mutual fund is not determined by offering and bidding for the fund, as which occurs for typical Securities Exchange listed stocks, closed-end funds, etc., on the Exchanges. In practice, investors can invest in mutual funds by dollar amount (and may receive fractional shares) or in a stated number of shares. Fund share prices are traditionally calculated at end-of-day on the basis of the NAV of the fund shares after the fund's daily securities transactions have been applied to the fund's portfolio. A typical fund purchase or redemption transaction occurs after calculation of NAV.
Funds (as registered under the Investment Company Act of 1940) can generally be categorized as closed-end funds and open-end (mutual) funds. Closed-end funds have a fixed number of issued and outstanding shares that can be traded between two parties on a Securities Exchange on which the fund is listed, as well as on other trading platforms. For example, a closed-end fund can include 100,000,000 issued and outstanding shares and be listed for trading on the NY Stock Exchange. The 100,000,000 shares is a fixed number and does not increase or decrease based on executed “buy” or “sell” orders of the closed-end fund by investors.
By comparison, an open-end mutual fund has a variable amount of shares that changes based on the aggregate amount of purchases and redemptions of fund shares over a predetermined period (e.g., daily, which is a traditional order and settlement time period). Traditional open-end mutual funds are not listed on any U.S. Securities Exchange, and thus do not trade on any U.S. Securities Exchange. Rather, an investor can purchase or redeem a quantity of fund shares directly through the mutual fund or via a Broker who has a contractual arrangement with the mutual fund to be able to purchase and redeem shares on behalf of investors. An example of a popular open-end mutual fund is the Fidelity Magellan (“Magellan”) Fund (ticker “FMAGX”) which is one of a family of funds issued by the investment firm Fidelity Investments of Boston, Mass. There are thousands of other open-end mutual funds that investors can purchase and redeem according to their investment preferences. All of the open-end mutual funds buy and sell underlying securities, such as stocks, bonds and other securities for their funds' portfolios for the benefit of their investors.
Referring to FIG. 5A, a prior art block diagram illustrating the difference between “purchase” and “redemption” orders of open-end mutual funds versus, referring to FIG. 5B, “buy” and “sell” orders of other types of securities other than ETFs, such as stocks and closed-end funds which are traded on a centralized Securities Exchange is shown. Specifically, traditional open-end mutual funds are either purchased or redeemed by the investors directly with the mutual fund, or via intermediaries (e.g., brokers) who act on the behalf of the investors. The open-end mutual fund is involved in each separate purchase and redemption transaction. The total amount of outstanding shares of open-end mutual funds can increase (via purchase transactions) or decrease (due to redemption transactions) each day.
The number of shares of an open-end mutual fund is variable based on the aggregate number of shares purchased and redeemed each day. By way of example in FIG. 5A, suppose the open-end Magellan Fund (i.e., ticker FMAGX) currently has 100,000,000 issued shares and a NAV per share of $25.00. If a new investor were to place a purchase order with the Magellan Fund for 40 shares of, or for $1,000.00 of the Magellan Fund, once the order is transacted, the investor would receive 40 shares (1,000/25) of the Magellan Fund, and the total number of issued shares of the Magellan Fund would increase by forty shares, to 100,000,040 shares. If the investor instead redeemed $1,000.00, then the total number of issued shares of the Magellan Fund would decrease by forty shares, to 99,999,960 shares. The same principle applies for all investors who purchase and redeem shares of any open-end mutual fund, in which an aggregate number of shares that are purchased and redeemed by all the investors is computed at the end of each business day to determine the total number of shares of the fund. Accordingly, it follows that (i) traditional open-end mutual funds do not have a fixed number of shares, such as stocks and other non-ETF Securities Exchange listed and “traded” securities; (ii) those open-end mutual funds do not trade on a centralized Securities Exchange or other trading platform, such as stocks are traded; and (iii) the purchase and redemption of the mutual funds are independent of one and another (i.e., the purchase and redemption of shares does not depend on the matching of shares between parties (i.e., trading of shares as between shareholders)).
Referring to the prior art block diagram of FIG. 5B, by contrast, “buy” and “sell” orders (i.e., trading orders) for existing shares of stock of publicly listed companies are traded by brokers, by being matched, usually at a Securities Exchange (e.g., NY Stock Exchange, NASDAQ Exchange and the like) or other trading platform. A publicly listed and traded company is not involved in the buy and sell transactions of its stock. Moreover, publicly traded companies, other than ETFs, have a fixed number of outstanding shares which do not increase or decrease due to buy and sell orders, respectively. As shown in FIG. 5B, 100 shares of a stock illustratively having a ticker XYZ can only be bought by an investor when the Securities Exchange, or other trading platform, matches the buy order of 100 shares of XYZ with an XYZ sell order of another investor. Thus, the transaction of one investor is dependent on the availability from another investor. Moreover, the total number of issued XYZ shares does not increase or decrease due to the buying and/or selling of such shares.
Once the purchase and redemption of mutual fund shares occurs, the majority of mutual fund share orders and monies due are cleared and settled through a Fund/Securities Clearing Agent. For example, one such Fund/Securities Clearing Agent is Fund/SERV, services offered by the National Securities Clearing Corporation (“NSCC”), which is currently a subsidiary of the Depository Trust and Clearing Corporation (“DTCC”).
Although specific brokerage firms provide their customers with daily purchase and redemption processing services for mutual fund shares through their own “fund supermarkets” and/or their proprietary fund distribution systems, there are various shortcomings with such services. Such firms generally allow only selected funds into their distribution systems and offer either (i) ‘load’ funds, or (ii) ‘no-load’ funds with either ‘no transaction fees’ or ‘transaction fees’ to their customers. Fund supermarkets that offer ‘no transaction fee’ funds to investors generally charge those mutual funds and/or their investment advisers/distributors annual asset-based fees of up to 40 basis points (e.g., 0.0040 bps×$1,000 of assets=$4.00 per year). Often, all or a portion of these fees are deducted from a fund's NAV, thereby resulting in lower investment returns for investors than might otherwise be the case. Fund supermarkets that offer ‘transaction fee’ funds generally charge investors higher fees to purchase or redeem ‘no-load’ mutual fund shares than to make regular stock trades. Sales ‘loads’ and ‘transaction fees,’ and other fees for ‘no transaction fee’ funds which are charged by brokers, can also cost investors a relatively significant percentage of their fund purchases, and thereby diminish their total investment returns in such funds.
Thus, there is a need for a centralized system and method that increases mutual fund distribution among more investors, more funds, more Member Firms and other industry participants. There is also a need for a system and method that reduces fund expenses and lowers distribution costs for funds, their investment advisors/distributors and investors. Additionally, there is a need for a system and method that increases investor returns in open-end mutual funds. Further, there is also a need for an efficient system and method to aggregate mutual fund orders by setting and prioritizing business rules for such aggregation.